Short-Term Stats Continue to Mislead

On May 7 the S&P 500 closed at 1625. Here we are, nearly six weeks later, and the index is at 1626. Oh, sure, in the meantime the S&P has traveled up to 1687 and down to 1598. But, in the end, it's done nothing but chop about for six weeks.

As for the Russell 2000, it got to my target of 990 on May 15. It has since rallied to tag 1000 and sunk to 963 -- but here it is at 981, five weeks later, still toying about at the target price. The story is not any different on the PowerShares QQQ (QQQ), where my target price was $73 to $73.50. That was achieved in mid-May. The QQQ then had a fling to $75, and we now find it back at $72.28.

Yet, in all this time of churning and chopping and making no progress -- whether up or down -- sentiment has gone from complacent to fearful. Lately I have been quoting the put-call ratio quite a bit. That's because it has been above 100% for nine out of the last eleven trading days. On the chart below I have circled where the 10-day moving average was on May 15, when many of the indices had been quoted above were where they are now, or within 1%. Look at what this moving average has done In the meantime.

That moving average is now at the highest reading in a year. The rise in fear made a lot of sense, as the S&P was down about 10% or so into that swoon in June 2012. But here we are, with the market essentially flat over the course of six weeks -- and down a mere 4% from an intraday high and 2% on a closing basis -- and the fear is running rampant.

This moving-average line should peak this week and head downward. As you can see, it is pretty standard for a peak in the indicator to accompany a low in the stock market. Turn your eyes to the arrow on the chart, in the spring of 2012. You can see the moving average also rose while the market was not far off its high. Sure it was not the same outsized move as we have seen this time around, but we have previously seen a small move in the index be accompanied by a rise in bearish sentiment.

I looked back to see what some of the intermediate-term indicators were doing in the spring of 2012, and I discovered that the McClellan Summation Index looks remarkably similar. Last year it had run to a higher high, and then fell off a cliff, as it did now.

I see the 30-day moving average of the advance-decline line was remarkably similar as well to that time period. It had gotten to a moderate oversold condition with the S&P barely off its high (boxed on the chart). It had a small push upward and then came down to a much better oversold reading.

The Oscillator was in a somewhat similar state: It got to a gross oversold condition, even though the S&P was not down very much. This indicator, too, bounced and came down again to a "better" oversold reading. On this chart, though, there is a distinct difference between last year and this year: The reading did not go from overbought to oversold in a flash, the way it's done now. In 2012, there was a lower high in the Oscillator, and so the decline wasn't so dramatic.

So I still say the market is short-term oversold enough to rally, but the intermediate-term indicators continue tell a different story.

HR

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